How To Invest Your Annual Bonus Each Year To Pay Yourself Even More
Written by
John Csiszar
Edited by
Gary Dudak
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One of the key strategies you can use to get ahead financially is to invest any “found” money. “Found” money is any income you receive that is outside of your normal salary.
For example, if you receive an inheritance, a tax refund, or even a year-end bonus, you should direct as much of that money as you can toward your long-term investments. In other words, if you continue living within your means and your budget regardless of any extra money you receive, you’ll find yourself much better off in the long run. So, what are the best ways you can invest your annual bonus each year to pay yourself even more?
Plan for Its Arrival
While you may not know the exact amount of your annual bonus, the fact that it’s called an “annual bonus” means you know that it’s likely coming every year unless you have woefully underperformed at work. But here’s the key — rather than spending it ahead of time anticipating that your bonus will cover your bills, stay within your budget and live your life as if you’re not receiving any annual bonus at all.
Yes, it can certainly be tempting to feel like that money is a “reward” that you’re entitled to spend as you please, but setting it aside for investments shouldn’t hurt as much as if it was coming out of your monthly paycheck.
Transfer It Immediately
Human nature being what it is, the best way to “protect” your annual bonus and be sure it goes into your investments is to transfer it the second it arrives. As soon as you see your bonus in your account, make an immediate online transfer before you have a chance to start thinking about other ways you can spend it. The longer it sits there and beefs up your checking account balance, the more likely you’ll end up spending it.
If you work for a major employer, you may be able to have your HR department deposit your bonus directly into your retirement plan rather than having it paid to your checking account. This is the best method of all to ensure that it gets invested rather than spent, as you won’t ever have direct access to the money. Without any effort on your part, your annual bonus will immediately boost your long-term retirement savings. Even better, if your employer matches your 401(k) contributions, as most do, you’ll make even more “free” money on your annual bonus.
Invest It More Aggressively
While you should never invest so aggressively that you’re uncomfortable, it can pay to invest “found” money like your annual bonus at the top end of your risk tolerance. Since this money isn’t income you’re counting on, if you were to take a loss on it, technically speaking, you wouldn’t be any worse off than if you never received it in the first place.
This isn’t to say that you should dump your entire bonus into super-speculative areas like cryptocurrency. However, being slightly more aggressive with your money, especially if you are still younger, can juice up your long-term returns if invested prudently.
Pay Off Your High-Interest Debt
Although putting your bonus into your long-term investments is a sound strategy, there are additional things you can do with it to shore up your financial foundation. If you still have outstanding high-interest debt, such as a credit card balance, you may want to direct some or all of your bonus to paying that down. With most credit card interest rates in excess of 20%, you’ll usually earn a higher effective return by paying that down instead of investing, even in the stock market.
It can also take some pressure off your monthly budget. With no more need to allocate part of your monthly check toward debt service, your bonus will essentially be “paying you more” since you’ll end up with more money in your pocket every pay period.
Boost Your Emergency Fund
Another option is to build up your emergency fund. Without a solid emergency fund, you’re more likely to go into debt to pay for any financial surprises, and that can undermine your long-term solvency.
While most financial advisors suggest having at least three to six months of expenses in your emergency fund, some recommend just getting $1,000 in it to start, as that is enough to cover most minor emergencies. If you don’t have anything at all in your emergency fund — or if you feel that it’s coming up a bit short — that’s another good way to use your annual bonus.
Allocate It to Different Savings Buckets
In addition to retirement savings, most investors have different savings goals they are trying to reach. For example, you might be saving up for the down payment for a house, your wedding, or your kids’ education in addition to your retirement. Funneling your annual bonus into high-yield savings accounts for each of these goals is a good way to get ahead financially without having to dig into your monthly paycheck.
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